Business Maverick

BUSINESS MAVERICK OP-ED

The nailbiting road to economic recovery

The nailbiting road to economic recovery
The road ahead is uncertain and, as former Bank of England governor Mervyn King says, managing the process will have to be done on a trial-and-error basis. He, and many others, see a second peak in infections as the most significant risk to economic recovery.

As economies prepare to get back to business — little by little — governments will have to manage the many risks that lie ahead, not least the looming risk of a second round of coronavirus infections. Japan is experiencing this painful reality — and it’s something South Africa and other countries are trying their best to avoid. A slow-and-steady approach to coming out of lockdown may, however, leave some sectors of the economy way behind.

South Africa and an increasing number of countries worldwide are poised to get the wheels of their economies going again — albeit on life support and at high risk of a second round of coronavirus infections.

As we head into May, the economic experts are gaining ascendancy over the airtime devoted to the health experts as the balance of policy-making shifts. More and more thought is going into how sectors of the economy can be nursed into recovery and then coaxed into standing on their own during the year/s ahead.

It won’t be soon, given the extent of the damage already inflicted — and there’s a consensus that some sectors could take a lot longer to recover. Manufacturing, mining and construction are the first to get out of the gates in the phased lifting of the lockdown, which gives them a head start on the discretionary sectors, for a start.

Thus, the outlook for the retailing, travel and entertainment sectors is a lot less evident. Not only could it be sometime before they can return to work as usual, but they are also likely to be vulnerable to potentially far-reaching changes in consumers’ buying behaviour.

Before considering where the economy is likely to go once countries start lifting the lockdown restrictions in May, it’s worth looking at where we are now economically. Last week Purchasing Managers’ Index data in the US and Europe highlighted the divergent performance of the manufacturing and services sectors, both hard hit in April, but to varying degrees.

All of these indices came in below expectations and reached historical lows, but the Services PMIs were almost half the expected levels. The Eurozone Services PMI came in at 11.7 compared with consensus expectations of 23.8. The US Services PMI undershot expectations by more than 10 percentage points, coming in at 27 versus the 39.8 expected.

Meanwhile, the Eurozone Manufacturing PMI was a couple of percentage points lower than projected at 33.6 (39.2 expected), and the US Manufacturing PMI was 36.9 (38 expected). All were well below 50 — above which signals economic expansion.

China’s economy, which has been the world’s first mover after exiting economic shutdown cautiously during April, is also battling. Industrial production numbers were dismal in the face of a lack of foreign demand and a local consumer market that is not yet ready to start spending on non-essential goods. Industrial production slumped 8.7% month-on-month in March — its most significant decline in the 2000s.

South African economic statistics that give an initial indication of the extent of the slowdown in April have yet to be released. But financial analysis by the SA Reserve Bank and Moody’s rating agency foresees the economy contracting by 6% and 6.5% this year. Moody’s downgraded its previous growth forecast of 4.5% to incorporate the economic cost of the R500bn Covid-19 fiscal rescue package. Ultimately, the accuracy of those estimates will be dependent on how and how quickly economies can gear up production capacity to previous levels.

The road ahead is uncertain and, as former Bank of England governor Mervyn King says, managing the process will have to be done on a trial-and-error basis. He, and many others, see a second peak in infections as the most significant risk to economic recovery. Also, a huge challenge will be to prevent firms and businesses from going under. Failure to do so would turn a liquidity crisis into a solvency crisis.

At home, Absa Group senior economist Peter Worthington doesn’t see the SA economy rebooting in the third quarter even if the pandemic is brought under control by the end of the third quarter. He expects to see many parts of the economy damaged until then: “firms will close, people will lose their jobs, capital will have fled to safety. This will not be easy to recover from”.

On the bright side, he says the authoritative way President Cyril Ramaphosa has handled the crisis may enable him to follow through on significant structural reforms that would sharply lift South Africa’s growth potential.

The retail sector is likely to be one of the hardest-hit industries — taking longer to recover and possibly subject to profound changes in consumer demand. McKinsey attempted to answer the question: Can retail ever bounce back from the coronavirus? It notes that last week the US Commerce Department reported that retail sales plunged more than 8% in March, which was the most significant decline in the almost 30 years the government has been tracking the data.

The consulting company estimates that up to 50% of discretionary consumer spending may be lost and that for the $2.5-trillion global fashion industry, that could mean a 30% year-on-year decline in revenue during 2020.

It is seeing dramatic shifts in consumer behaviour and purchasing patterns as a result of the pandemic.

“During times of crisis, people hold off on buying non-essential items while stocking up on necessities.” Consumer research conducted by McKinsey found that survey respondents in Italy, Spain, the US and the UK said they would spend more on groceries and household supplies and less on jewellery, clothes, hotel stays, furniture, appliances, and international and domestic travel.

“In addition, given the widespread practice of physical distancing and self-quarantine, consumers are focusing more of their spending online,” it noted.

These shifts in spending are understandable given the conditions of stricter lockdowns, like South Africa’s, globally. The million-dollar question is whether these behaviours will become more prevalent in the long term. The second round of coronavirus, as Japan is currently experiencing, would certainly knock consumer confidence substantially and likely entrench some of these behaviours for some time.

In an assessment of the uncertain path to global economic recovery, rating agency Standard & Poor’s makes a case that the pandemic will peak around midyear, based on the largest global economies gradually lifting lockdown measures in May and reopening economic activities in stages through to the third quarter.

It confirms that, based on the Chinese experience, services sectors, namely leisure, retail, travel, hospitality and gaming, will be more hit by social-distancing measures than manufacturing activities are.

“Until an effective treatment or vaccine is in place, significant uncertainties surround the resolution of the pandemic. Possible multiple waves of infection might lead to on/off lockdowns. Any prolongation in containment measures or return to lockdowns could result in a disproportionate hit to the economic and credit risks, threatening employment and the survival of a large number of companies.”

The rating agency says unprecedented fiscal and monetary support “is critical to preserve the economic fabric and well-functioning capital markets, thereby supporting the chances of a stronger path to recovery”.

King summed up what is under way in the world right now by saying the pandemic has suspended the operations of a market economy and that the world needs to get to the point where the market economy can begin running again. That still feels like an extraordinarily long way off! BM

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